Basic Accounting Principles

Basic Accounting Principles

Accounting has been defined as, by Professor of Accounting at the University of Michigan William A Paton as having one basic function: “facilitating the administration of economic activity. This function has two closely related phases: 1) measuring and arraying economic data; and 2) communicating the results of this process to interested parties.”

As an example, a company’s accountants systematically measure the profit and loss for a month, a quarter or a fiscal year and proclaim these reports in a statement of profit and loss that’s called an income statement. These statements include elements such as accounts expected (what’s owed to the company) and accounts payable (what the company owes). It can also get reasonably problematic with subjects like retained earnings and accelerated depreciation. This at the higher levels of accounting and in the organization.

Much of accounting though, is also concerned with basic bookkeeping. This is the method that records every transaction; every bill paid, every dime owed, every pound and pence spent and accumulated.

But the owners of the corporation, which can be individual owners or millions of shareholders are most troubled with the summaries of these transactions, contained in the financial statement. The financial statement summarizes a company’s assets. A value of an asset is what it cost when it was first obtained. The financial statement also records what the sources of the assets were. Some assets are in the form of loans that have to be paid back. Profits are also an asset of the business.

In what’s called double-entry bookkeeping, the liabilities are also summarized. Obviously, a business wants to show a higher amount of assets to offset the liabilities and show a profit. The management of these two elements is the essence of accounting.

There is a system for doing this; not every company or individual can devise their own systems for accounting; the result would be anarchy!